Authorization and Appropriations for FY2003: Defense

July 12, 2002 –
December 6, 2002
RL31305

Congress has completed action on the FY2003 defense authorization ( H.R. 4546 ) and
defense appropriations ( H.R. 5010 ) bills. The President signed the FY2003 defense
appropriations act into law on October 23 ( P.L. 107-248 ), and he signed the FY2003 defense
authorization act into law on December 2 ( P.L. 107-314 ). In addition, Congress has approved, and
the President has signed, the military construction appropriations bill ( H.R. 5011 , P.L.
107-249 ). The House and Senate Appropriations Committees did not, however, take up bills to
provide $10 billion that the Administration requested as a contingency fund for costs of
counter-terrorism operations in FY2003.
The conference agreement on the defense appropriations bill establishes final funding levels
for key defense programs, and it resolves a number of matters that were at issue during the year. As
the Administration requested, the bill eliminates funds for development of the Crusader artillery
system and instead provides increased funding for other Army indirect fire programs. Conferees
added funds to develop an alternative tube artillery system to be deployed by 2008. Earlier, the
conference report on the FY2002 supplemental appropriations bill ( H.R. 4775 , P.L.
107-206 ) directed the Army to enter into a follow-on contract to use Crusader technology in
developing such a system.
Conferees on the defense authorization bill reached agreement on several contentious issues,
though some may recur next year. The key issue, which held up the conference agreement until after
the mid-term elections, was whether to permit concurrent receipt of military retired pay and veteran's
disability benefits. The Senate authorization bill included a provision to allow immediate, full
concurrent receipt, while the House bill phased in a program to allow concurrent receipt for those
with 60% or greater disabilities. The White House threatened to veto a bill that included either
provision. The conference agreement provides a new benefit, paid by the Defense Department, to
military retirees who have a disability determined to be caused by a combat or combat-related injury.
The conference agreement on the defense authorization also resolved a number of other issues.
The agreement includes amended versions of Senate provisions tightening oversight of missile
defense programs; it drops a House provision concerning application of the Endangered Species Act
to defense facilities, but includes a provision concerning the Migratory Bird Treaty Act; it prohibits
FY2003 funds from being used to develop nuclear armed interceptors for missile defense; it provides
funds for developing a nuclear-earth penetrator warhead, but only after the Defense Department
submits a report on the project that includes a review of non-nuclear alternatives; and it drops a
Senate provision permitting service members to have access to abortions at military facilities
overseas.

Summary

Congress has completed action on the FY2003 defense authorization (H.R. 4546) and defense appropriations (H.R. 5010) bills. The President signed the FY2003 defense
appropriations act into law on October 23 (P.L. 107-248), and he signed the FY2003 defense
authorization act into law on December 2 (P.L. 107-314). In addition, Congress has approved, and
the President has signed, the military construction appropriations bill (H.R. 5011, P.L.
107-249). The House and Senate Appropriations Committees did not, however, take up bills to
provide $10 billion that the Administration requested as a contingency fund for costs of
counter-terrorism operations in FY2003.

The conference agreement on the defense appropriations bill establishes final funding levels for key defense programs, and it resolves a number of matters that were at issue during the year. As
the Administration requested, the bill eliminates funds for development of the Crusader artillery
system and instead provides increased funding for other Army indirect fire programs. Conferees
added funds to develop an alternative tube artillery system to be deployed by 2008. Earlier, the
conference report on the FY2002 supplemental appropriations bill (H.R. 4775, P.L.
107-206) directed the Army to enter into a follow-on contract to use Crusader technology in
developing such a system.

Conferees on the defense authorization bill reached agreement on several contentious issues, though some may recur next year. The key issue, which held up the conference agreement until after
the mid-term elections, was whether to permit concurrent receipt of military retired pay and veteran's
disability benefits. The Senate authorization bill included a provision to allow immediate, full
concurrent receipt, while the House bill phased in a program to allow concurrent receipt for those
with 60% or greater disabilities. The White House threatened to veto a bill that included either
provision. The conference agreement provides a new benefit, paid by the Defense Department, to
military retirees who have a disability determined to be caused by a combat or combat-related injury.

The conference agreement on the defense authorization also resolved a number of other issues. The agreement includes amended versions of Senate provisions tightening oversight of missile
defense programs; it drops a House provision concerning application of the Endangered Species Act
to defense facilities, but includes a provision concerning the Migratory Bird Treaty Act; it prohibits
FY2003 funds from being used to develop nuclear armed interceptors for missile defense; it provides
funds for developing a nuclear-earth penetrator warhead, but only after the Defense Department
submits a report on the project that includes a review of non-nuclear alternatives; and it drops a
Senate provision permitting service members to have access to abortions at military facilities
overseas.

<center>Key Policy Staff</center>

Area of Expertise

Name

Telephone

E-Mail

Acquisition

Valerie Grasso

[phone number scrubbed]

[email address scrubbed]

Aviation Forces

Christopher
Bolkcom

[phone number scrubbed]

[email address scrubbed]

Arms Control

Amy Woolf

[phone number scrubbed]

[email address scrubbed]

Arms Sales

Richard Grimmett

[phone number scrubbed]

[email address scrubbed]

Base Closure

David Lockwood

[phone number scrubbed]

[email address scrubbed]

Defense Budget

[author name scrubbed]
[author name scrubbed]

[phone number scrubbed]
[phone number scrubbed]

[email address scrubbed]
[email address scrubbed]

Defense Industry

Gary Pagliano

[phone number scrubbed]

[email address scrubbed]

Defense R&D

John Moteff

[phone number scrubbed]

[email address scrubbed]

Ground Forces

Edward Bruner
Steven Bowman

[phone number scrubbed]
[phone number scrubbed]

[email address scrubbed]
[email address scrubbed]

Health Care; Military

Richard Best

[phone number scrubbed]

[email address scrubbed]

Intelligence

Richard Best

[phone number scrubbed]

[email address scrubbed]

Military Construction

Daniel Else

[phone number scrubbed]

[email address scrubbed]

Military Personnel

David Burrelli
Robert Goldich

[phone number scrubbed]
[phone number scrubbed]

[email address scrubbed]
[email address scrubbed]

Military Personnel;
Reserves

[author name scrubbed]

[phone number scrubbed]

[email address scrubbed]

Missile Defense

Steven Hildreth

[phone number scrubbed]

[email address scrubbed]

Naval Forces

[author name scrubbed]

[phone number scrubbed]

[email address scrubbed]

Nuclear Weapons

Jonathan Medalia

[phone number scrubbed]

[email address scrubbed]

Peace Operations

Nina Serafino

[phone number scrubbed]

[email address scrubbed]

Radio Frequency,
Military

Lennard Kruger

[phone number scrubbed]

[email address scrubbed]

Readiness

[author name scrubbed]

[phone number scrubbed]

[email address scrubbed]

Space, Military

Marcia Smith

[phone number scrubbed]

[email address scrubbed]

War Powers

David Ackerman
[author name scrubbed]
Richard Grimmett

[phone number scrubbed]
[phone number scrubbed]
[phone number scrubbed]

Most Recent Developments

On November 12, the House, and on November 13, the Senate, approved a conference
agreement on the FY2003 defense authorization bill (H.R. 4546), and the President
signed the bill into law on December 2 (P.L. 107-314). Earlier, on October 10, the House, and on
October 16, the Senate, approved a conference agreement on the FY2003 defense appropriations
bill (H.R. 5010), and the President signed it into law on October 23 (P.L. 107-248).
The conference agreement on the defense appropriations bill provides $355.1 billion for programs
it covers. This is $11.7 billion below the Administration's request. The bill does not include $10
billion that the Administration requested as a contingency fund for costs of counter-terrorism
operations in FY2003.

Status of Legislation

FY2003 Defense Authorization Bills. On May
1, the House Armed Services Committee marked up its version of the FY2003 defense authorization
bill, H.R. 4546. The committee also considered, but did not report, a companion
measure, H.R. 4547, to provide funds for the war on terrorism. The House passed
H.R. 4546 early on the morning of May 10. On May 9, the Senate Armed Services
Committee completed marking up its version of the FY2003 defense authorization, S. 2514, and a report was issued on May 15. On June 13, the committee approved an amendment to
be offered on the floor regarding the Crusader artillery system. On June 18, the full Senate began
considering the bill, and the Senate passed the bill on June 27. On July 18, the House Armed
Services Committee reported H.R. 4547, entitled the Cost of War Against Terrorism
Authorization Act (COWATAA), and the full House approved the bill under suspension of the rules
on July 24. On November 12, a conference report on the bill was filed. The conference agreement
was approved in the House under suspension of the rules on November 12. The Senate approved
the conference report on November 13 by voice vote. The President signed by bill on December 2.

FY2003 Defense Appropriations Bill. On June 19, the House Defense Appropriations Subcommittee marked up its version of the FY2003 defense
appropriations bill, and on June 24, the full committee marked up the bill (H.R. 5010)
and ordered it to be reported. The House passed the bill on June 27. On July 18, the Senate
Appropriations Committee reported its version of the bill (also H.R. 5010). The Senate
passed the bill on August 1. On October 9, conferees announced agreement on a compromise
version of the bill. The House approved the conference report on October 10 and the Senate on
October 16. The President signed the bill into law on October 23.

FY2003 Congressional Budget Resolution. On March 20, the House passed its version of the annual congressional budget resolution,
H.Con.Res. 353, and the Senate reported its version, S.Con.Res. 100, on
March 22. Both versions recommended funding levels for defense in FY2003 very close to what the
Administration requested. The full Senate never considered the resolution on the floor, however,
and it the two chambers were not able to agree on a common budget. On May 22, as part of the rule
governing debate on supplemental appropriations, the House approved a measure deeming the
budget resolution, as approved in the House, to have been passed for purposes of guiding later action
on funding legislation.

FY2002 Supplemental Appropriations. On March 21, the Administration submitted a request for $27.1 billion in supplemental FY2002 appropriations
for activities in response to last year's terrorist attacks, of which $14 billion was for defense
programs. On May 24, the House approved its version of the bill, H.R. 4775, providing
$28.8 billion using Office of Management and Budget (OMB) scoring of a key provision (as
assumed by the appropriations committee) and $30.1 billion using Congressional Budget Office
(CBO) scoring. The Senate approved its version of the bill on June 7, providing $31.4 billion. On
July 18, conferees announced agreement on a compromise bill that provides $28.9 billion, including
$14.5 billion for defense. The House approved the conference report on July 23 and the Senate on
July 24, and the President signed the bill on August 2 (P.L. 107-206). Of the total in the bill, $5.1
billion was provided in contingent emergency appropriations, and on August 13, the White House
announced that the President would not designate those amounts as emergency funding. Without
those amounts, the total available for defense in the bill is $13.983 billion offset by $613 million in
rescissions.

The FY2003 Defense Budget Debate

On February 4, 2002, the Administration submitted its formal FY2003 budget
request to Congress. The Administration proposed $396.8 billion for the national
defense budget function, about $46 billion above the estimated FY2002 level (for an
overview of the request, see Appendix B). Of the total requested, $3.4 billion was
for full accrual accounting of civilian personnel retirement benefits, which Congress
ultimately did not approve. Without the accrual accounting change, the request was
$393.4 billion. Of this amount, $366.7 billion was requested for programs covered
by the defense appropriations bill, $9.7 billion by the military construction
appropriations bill, $16.5 billion for Department of Energy defense-related activities
funded in the energy and water appropriations bill, and the remainder in other
appropriations bills.

With a global war against terrorism underway, Congress was not inclined to make substantial changes in the Administration's request for a defense increase.
Early in the year, however, there was some skirmishing, particularly between the
defense committees and the budget committees, over two issues:

first, how to treat the Administration's request for $10 billion in FY2003 in an unallocated contingency fund for the war against terrorism and,

second, how to treat the Administration's request for full accrual accounting of civilian retirement benefits, which, across the whole
government, would increase discretionary spending by about $9 billion and reduce
mandatory spending by an equal amount (see Appendix B for a discussion of accrual
accounting).

National Defense Funding in the FY2003 Budget Resolution

For their part, the congressional defense committees would have preferred to be able to allocate the entire amount the Administration requested for national defense
as they saw fit. The House Budget Committee, however, set aside the $10 billion
requested for war costs in a reserve fund available only for that purpose. The House
also set aside funds for civilian accrual accounting in a reserve fund, while the Senate
Budget Committee rejected the shift to full accrual accounting altogether. Table 2
shows amounts recommended for national defense in the House and Senate versions
of the budget resolution, compared to the Administration request.

The House approved its version of the FY2003 budget resolution, H.Con.Res. 353, on March 20 by a vote of 221-209. In all, the measure
recommended $393.8 billion for the national defense budget function in FY2003, but
$10 billion of that amount was in the reserve fund available only for costs of the
global war against terrorism. An additional $3.4 billion, not shown in the national
defense total, was available for defense in the reserve fund to cover costs of accrual
accounting, if Congress approved it.

The Senate Budget Committee version of the resolution, S.Con.Res. 100, was reported on March 22 but was never brought up on
the Senate floor. The committee recommended $393.4 billion for national defense
in FY2003 and explicitly rejected a shift to full accrual accounting for civilian
employees. The committee also recommended lower levels of defense spending after
FY2004 than either the House or the Administration, though the committee set aside
future funds in a reserve to be available either for defense or deficit reduction.
Recommended national defense funding levels in the budget resolution are not
binding on the appropriations committees, however, which are free to allocate funds
for discretionary programs as they decide.

Treatment of Full Civilian Accrual Accounting

The $9 billion requested for full civilian accrual accounting was at the center of debate over the total amount available for appropriations bills. The House-passed
budget resolution provided $759 billion in total discretionary funding to the
appropriations committee, which is equal to the Administration request without the
$9 billion government-wide cost of shifting civilian accrual payments from the
mandatory to the discretionary side of the budget. The Senate reported version of the
budget resolution, however, provided $768 billion in discretionary funds, though it
did not assume that Congress would approve the shift of accrual funding. As a result,
without the $9 billion for accrual accounting, the House ended up marking up
appropriations bills with $9 billion less than the Senate. Eventually, this contributed
to a deadlock, and none of the appropriations bills, except for defense and military
construction, have been enacted.

How to treat the $10 billion that the Administration requested as an unallocated contingency for war costs was a matter of ongoing discussion. On May 22, the
House approved H.Res. 428, the rule governing debate on the FY2002
supplemental appropriations bill (H.R. 4775), which includes a
provision "deeming" the budget resolution, as passed by the House, to be in effect
for purposes of subsequent House action on appropriations and other funding bills.
Appropriators wanted the "deeming" language amended to allow the appropriations
committee to remove the reserve fund designation for the contingency funding, thus
letting the committee use the $10 billion as it decided. In the face of objections from
some conservatives, however, the House leadership did not agree, and the deeming
language refers to the measure as passed by the House on March 20.

The debate over treatment of the $10 billion contingency fund for war costs played out further in congressional action on the defense authorization bill. The
House Armed Services Committee approved the $10 billion in a separate bill,
H.R. 4547, the Cost of War Against Terrorism Authorization Act, and
used part of the money in that bill to finance programs that otherwise would have
been included in the regular authorization bill - see below for a full discussion. In
the end, however, the conference agreement on the defense authorization bill
approved the $10 billion as requested as an unallocated contingency fund for costs
of the war against terrorism. That amount was not appropriated, however. The
appropriations committees did not act on the $10 billion contingency request at all,
though funding for counter-terrorism activities may be addressed next year in a
supplemental appropriations measure.

Appropriations Action

The House version of the defense appropriations bill, H.R. 5010, approved on June 27, provided $354.7 billion for defense activities it covers
(excluding military construction programs, Department of Energy defense-related
activities, and defense-related activities of some other agencies). This was $12.1
billion below the amount requested, of which $10 billion was the counter-terrorism
contingency amount. The additional $2.1 billion reduction in defense was then
available for other appropriations bills, including the military construction bill, which
was $541 million above the request, and the energy and water bill, which includes
defense-related programs. The Senate version of H.R. 5010, approved
on August 1, provided $355.4 billion, $11.4 billion below the request. The
conference agreement on the defense appropriations bill provides $255.1 billion,
$11.6 billion below the request. (See Table C2 in the Appendices for details).

Key Issues in Congress

Along with negotiations about the overall level of defense spending, there was
considerable debate in Congress about priorities within the budget and about a
number of specific programs. The most contentious issue was whether to permit
concurrent receipt of military retired pay and veterans disability benefits. The House
authorization bill included a provision to phase in partial concurrent receipt. The
Senate bill included a measure approved on the floor to provide immediate, full
concurrent receipt. The White House Statement of Administration Policy on the
Senate bill threatened to veto any bill that includes either partial or full concurrent
receipt. The conference agreement on the defense authorization bill provides a
benefit payment only to military retirees with a disability determined to be caused by
a combat or combat-related injury.

Another major issue emerged at the beginning of May, on the eve of the House Armed Services Committee markup of the defense authorization bill, when the
committee received word that the Office of the Secretary of Defense (OSD) had
decided to terminate the Army Crusader self-propelled artillery program. The
committee did not agree to end the program, however, and it included full funding
for the Crusader in the bill that passed the full House. Subsequently, however, as
work on defense funding bills proceeded, Congress agreed to terminate the program,
though it added money for a new artillery system that the Administration had not
requested.

A major issue in the Senate debate over the authorization bill was the level of funding for missile defense. The Senate Armed Services Committee reduced
requested missile defense R&D funds by more than $800 million, freeing up funds
for, among other things, increased shipbuilding. Eight Republicans on the
Committee voted against reporting the bill, several citing the missile defense cut as
the reason. In floor action, however, the Senate voted to allocate $814.3 million in
anticipated inflation savings either to missile defense or to counter-terrorism.

Other major issues over the course of the year included provisions concerning environmental limitations on military training, missile defense funding and
management, and nuclear weapons development and testing.

The following discussion provides an overview of major elements of the Administration's request and of congressional action to date, with particularly
controversial items highlighted.

Counter-Terrorism Funding

The Administration requested a total of $19.4 billion in the FY2003 defense budget for costs of the global campaign against terrorism. Of the total, $10 billion
was requested as an unallocated reserve for future, as yet unplanned military
operations, and the remaining $9.4 billion was requested for specified activities. All
of the money, and an additional $700 million to support programs identified in the
Administration's Nuclear Posture Review, was requested to be appropriated to the
Defense Emergency Response Fund (DERF), a transfer account from which money
would then be allocated to operating accounts of the services. This would allow the
Defense Department considerable flexibility in using the money, since funds can be
shifted to different activities without going through normal reprogramming
procedures.

The counter-terrorism amounts requested for FY2003 are to carry on activities that were financed in FY2001 and FY2002 mainly through emergency supplemental
appropriations. Last autumn, Congress appropriated $40 billion for responding to the
terrorist attacks of September 11, of which $17.1 billion was devoted to defense
programs. On March 21, 2002, the Administration sent Congress a request for an
additional $27.1 billion in FY2002 supplemental appropriations for responding to the
terrorist attacks, of which $14.0 billion was for defense. On July 23, the House, and
on July 24, the Senate, approved a conference agreement on a bill providing $28.8
billion in supplemental appropriations for FY2002, of which$14.5 billion is for
defense. Of the total in the bill, $5.1 billion was appropriated as contingent
emergency funding, which requires the President to designate the funds as an
emergency before it is made available. The White House has announced that it does
not intend to designate the funds as an emergency, however. Of the $5.1 billion that
will not, therefore, be available, $983 million is for defense. (For a full discussion,
see CRS Report RL31406, Supplemental Appropriations for FY2002: Combating
Terrorism and Other Issues, by [author name scrubbed] and [author name scrubbed].)

Congressional Action. None of the congressional defense committees agreed to provide the $9.4 billion requested for
specific counter-terrorism programs in the DERF. Instead, all the committees
allocated funding to regular operating and acquisition accounts in the authorization
and appropriations bills. All the committees also reduced funding for combat air
patrols and for some other programs requested in the DERF.

In the end, Congress did not provide the $10 billion requested as an unallocated contingency fund, though it may provide part or all of the amount requested next year
in a supplemental appropriations measure. The House Armed Services Committee
considered the $10 billion in a separate bill, H.R. 4547. In preliminary
markup of the bill on May 1, the committee allocated $3.6 billion to specific
programs - later, that amount was reduced to $3.1 billion. All but about $200
million of that amount is for programs the Administration requested as part of the
$9.4 billion in specifically allocated counter-terrorism money. In effect, the
committee freed up about $3 billion of funds for other programs in the regular
authorization bill by using some of the $10 billion in the unallocated contingency
fund for counter-terrorism projects that otherwise would have been financed in the
regular authorization.

The Senate Armed Services Committee authorized the full $10 billion in a general provision (Section 1003) of its version of the authorization bill. The
provision authorized the full $10 billion for continuation of the war on terrorism,
subject to a specific request for the funds and to subsequent appropriations.

On July 3, after considerable prodding from Congress, the Administration submitted a formal budget amendment revising its request for the $10 billion. The
Administration did not provide significantly more detail on the allocation of the
funds, however. Instead, the revised request would authorize the Secretary of
Defense to transfer the $10 billion to various DOD appropriations accounts 15 days
after notifying Congress of the transfer. The letter accompanying the request
estimated that up to $2.55 billion would be for military personnel accounts, up to
$5.57 billion for operation and maintenance accounts (including the Defense Health
Program and Overseas Humanitarian, Disaster, and Civic Aid), military construction
or working capital funds; and up to $1.88 billion for appropriations for procurement
or research development. (The full text of the request is available electronically at:
http://w3.access.gpo.gov/usbudget/fy2003/pdf/15dod_amend.pdf.)

On July 18, the House Armed Services Committee marked up and reported a revised version of H.R. 4547. It provided $3.1 billion allocated to
specific programs, with another $6.9 billion in very broad categories. The House
took up the bill under suspension of the rules late in the evening of July 23, and the
bill was passed on July 24. Taken together, the regular defense authorization bill,
H.R. 4546, and the Cost of War Against Terrorism Authorization,
H.R. 4547, as passed by the House, authorized $392.8 billion for
national defense.

In the end, however, Congress did not approve the House Armed Services Committee's effort to use part of the contingency fund for war costs to finance an
increase in other defense programs. The conference report on the defense
authorization bill provides $10 billion as an unallocated reserve for war costs, as
requested, and as in the Senate version of the bill.

More importantly, the disposition of the $10 billion requested for counter-terrorism ultimately depended on what happened in appropriations bills. The
conference report on the defense appropriations bill does not provide any of the
money, and the appropriations committees did not take up separate legislation to
provide additional funding for the war on terrorism.

Personnel Pay and Benefits

The Administration request included a 4.1% pay raise for military personnel; additional selective pay increases for mid-grade personnel that could increase their
pay raise to 6.5%; the extension of special pays and bonuses to bolster retention of
personnel with critical skills; and continued incremental increases in the basic
allowance for housing intended to eliminate out-of-pocket off-base housing costs by
FY2005.

Congressional Action. Pay raises and benefits for uniformed military personnel and authorized military end-strength
are under the jurisdiction of the Armed Services Committees and are addressed in the
annual defense authorization bill. The defense appropriations bill formally provides
funding for military personnel, but it does not authorize the pay raise or benefits,
though it sometimes makes changes in some personnel-related activities.

Both the House and the Senate Armed Services Committees approved the Administration's proposed pay and benefits increases, and the authorization
conference report provides the full 4.1% pay raise and other targeted pay increases
as requested. A number of significant personnel related issues emerged, however.
The major issue concerned concurrent receipt of retirement and disability benefits.
Other issues included House cuts in funding for health benefits accrual and a House
and Senate increase in authorized active duty military end-strength.

Concurrent Receipt of Retirement and Disability Benefits. Under current law, military retirees - who leave
after 20 years or more of service - are eligible for payments from the Veterans
Administration (VA) for service-connected disabilities, but their military retirement
pensions are reduced by the amount of disability benefits received. Individuals who
qualify often accept the disability benefits, however, because VA disability payments
are not taxed, while pensions are.

Veterans organizations have long argued that individuals should be able to receive both full retirement pensions and VA disability benefits without any offset.
Last year, Congress approved a measure to phase in partial concurrent receipt (as in
the House plan this year), but it was contingent on the Administration taking steps
to fund the measure, and the Administration did not do so. This year, concurrent
receipt was a critical issue both in the House and in the Senate.

The House-passed authorization bill approved a plan to phase in a measure that would allow military retirees with a disability of 60% or greater to receive both
disability benefits and retirement pensions. Allowing phased in, partial concurrent
receipt, as in the House bill, would cost an estimated $516 million in FY2003, $5.8
billion over the five years from FY2003 through FY2007, and $17 billion over ten
years through FY2012. These amounts would be scored not as discretionary funding
in the defense bills, but as mandatory spending coming either from mainly from the
military retirement trust fund.

The measure would also require an increase in contributions to the military retirement fund to cover the accrual cost of the increased benefits payable in the
future to current military personnel. The House measure provides that the accrual
payments will be made from the general Treasury, however, rather than from
discretionary funds in the defense budget. Including both increased payments to
retirees and payments from the general fund into the military retirement fund, the
Congressional Budget Office estimates that the total budget cost of the House plan
would be $1.1 billion in FY2003, $8.8 billion over the five years, FY2003-FY2007,
and $22.6 billion over the next ten years through FY2012.
(1)

The Senate Armed Services Committee included a similar, phased in, partial measure in its reported bill, but the committee also voted to offer an amendment on
the floor that would immediately allow full concurrent receipt of disability and retired
pay regardless of the level of disability. Senators Levin and Warner brought up that
amendment on the floor on June 19, and it was approved by a voice vote. The
Senate-passed measure did not insulate the Defense Department from the accrual
costs of the increased benefits as the House measure did. CBO estimated that the
Senate version of concurrent receipt would cost $4.3 billion in FY2003, $25.8 billion
over the next five years, and $61.0 billion over the next ten years. Of those amounts,
the Defense Department would have to provide $1.1 billion in FY2003, $2.5 billion
over the next five years and $6.4 billion over the next ten years in its budget to cover
accrual payments for its current military personnel. (For a full discussion of the
budget issues, see CRS Report RS21327, Concurrent Receipt of Military Retirement
and VA Disability Benefits: Budgetary Issues, by [author name scrubbed].)

For its part, the Administration opposed permitting concurrent receipt. In its "Statement of Administration Policy" on the Senate authorization bill (available at
http://www.whitehouse.gov/omb/legislative/sap/107-2/S2514-s.html), the White
House threatened to veto the defense authorization if it provided for either partial or
full concurrent receipt. The Defense Department also threatened a veto in the
package of appeals of provisions in the House and Senate authorization bills that it
sent to the Armed Services Committees on July 24 and in a letter that Secretary of
Defense Rumsfeld sent to Senator Levin and Senator Warner on September 24.

The dispute over concurrent receipt held up a conference agreement on the defense authorization bill until after the November elections. On November 12,
during the 107th Congress's lame duck session, authorizers announced a compromise
on the issue that provides a new benefit for retirees who are determined to have a
disability caused by a combat or combat-related injury. Payments would be made to
all retirees with a disability of 10% or greater resulting from an injury or wound for
which the retiree was awarded a Purple Heart. Payments would also be made to
retirees with a disability of 60% or more resulting from combat-related activities,
which include injuries received as a direct result of armed conflict, while engaged in
hazardous service, while performing duty under conditions simulating war, or
through an instrumentality of war. As explained by the bill managers on the House
floor on November 12 (see Congressional Record, pp. H8536-8537), injuries caused
by instrumentalities of war include an injury cause by a mine, accidents during
combat, or sickness caused by fumes, gas, or military ordnance. The amount of the
payment to each individual will be equal to the amount that would be paid as a VA
disability benefit.

Exactly how many retirees will qualify for the new benefit is not known; preliminary estimates are in the range of 30,000. The Defense Department is
responsible for administering the program, and it will have to establish criteria for
determining eligibility. Table 3 shows a preliminary Congressional Budget Office
(CBO) estimate of the costs.

As the provision is written, these amounts will be paid directly by the Defense Department out of its current budget rather than from the military retirement fund.
These amounts, therefore, will be subject to annual appropriations. The FY2003
defense appropriations bill, which was passed before the authorization bill, did not
provide funding. To cover the costs, the Defense Department may reprogram money
or request supplemental appropriations.

Reduction in Funding for Estimated Cost of Retiree Health Care Benefits. When it submitted its budget request, the
Administration estimated that the Defense Department would have to pay $8.1 billion
in FY2003 into the retiree health care reserve fund for accrual costs of 65-and-over
health care benefits (see the discussion of accrual accounting in Appendix B, below).
Later officials said that DOD actuaries were expected to reduce the estimated cost
when they convened later in the year. The House Armed Services Committee
reduced military personnel funding by $810 million, 10% of the estimated cost of
health benefits accrual. Representative Spratt, the second ranking Democrat on the
committee, criticized this measure, saying that the $810 million is at the upper limit
of the amount DOD said might be saved. If defense actuaries did not revise their cost
estimate as much, there could be a shortfall of several hundred million dollars in
military personnel accounts.

The House Appropriations Committee reduced funding for health benefits accrual by $405 million, the lower end of DOD estimates of likely savings. The
Senate Appropriations Committee reduced accrual contributions by $372.6 million
to reflect changes in retiree health benefits that were approved in the FY2002 defense
authorization act (P.L. 107-107). The committee also said it would revisit the
amount of accrual contributions after defense actuaries met. The Administration
package of appeals on the House and Senate authorization bills opposed the House
authorization measure. The conference agreement on the defense appropriations bill
reduces funding for health benefits accrual by $405 million.

Increase in Personnel End-Strength. The House Armed Services Committee approved an increase of 12,552 in active duty
end-strength, including increases in full time guard and reserve personnel. The
House-passed authorization bill provided $528 million in FY2003 to cover associated
costs in the military personnel accounts. Each of the military services has requested
an increase of personnel end-strength recently, with Army seeking the largest
increment of as many as 40,000 additional soldiers over the next few years.
Secretary Rumsfeld has resisted increases, however, arguing repeatedly that added
personnel would be very expensive over the long term and that measures should
instead be taken to reduce demands on the force.

It was not clear whether the House Armed Services Committee intended the end-strength increase to be a temporary measure related to the war against terrorism
or a permanent addition to the force. Once fully phased in, an increase of 12,552 in
end-strength would cost more than $1 billion a year in the personnel accounts (see
Table 4), with additional costs required in operation and maintenance accounts to
fully train, sustain, and equip the added troops.

Table 4. Congressional Budget Office Estimate of the Costs of the House Armed Services Committee Increase in Active Duty End-Strength (budget
authority in millions of dollars)

The Senate Armed Services Committee did not include an increase in end-strength in the authorization bill it reported. But on the floor on June 27, the
Senate approved an amendment offered by Senators Cleland and McCain to increase
authorized active duty end-strength by 12,000. Senator Cleland called for an increase
of 40,000 service members over the next five years. The Defense Department's
package of appeals on the authorization opposed any increase in end-strength.

The House Appropriations Committee did not approve an increase in end-strength, arguing that requirements are uncertain. The committee report said that
any increase that might be needed in FY2003 should be addressed in a supplemental
appropriations request. The Senate Appropriations Committee also did not approve
an increase in end-strength. The appropriations conference report does not include
funds for an overall increase in end-strength.

The conference agreement on the defense authorization bill does not include an increase in end-strength. In report language, conferees said that an increase is needed
but that the appropriations bill did not provide enough money. The conference
agreement also allows the Secretary of Defense to increase end-strength by up to 3%
above the authorized level - standing law had allowed a 2% increase - and it gives
the military service secretaries independent authority to increase end-strength by up
to 2%. The agreement also establishes a floor on end-strength equal to the requested
levels, and it repeals a measure that allowed the Secretary of Defense flexibility to
reduce end-strength below authorized levels.

Army Modernization

The Army's modernization plan involves three overlapping initiatives: one, to upgrade and recapitalize the existing "legacy" force of heavy armored forces; a
second to build new, more easily deployable "interim brigade combat teams"; and a
third to develop the "objective force" of the future.

Key elements of legacy force modernization include upgrading existing weapons with digitized communications links and new surveillance and reconnaissance
capabilities. The most controversial elements of the plan have been the Comanche
helicopter, which has experienced repeated development delays and cost increases,
and the Crusader artillery system.

The central element of the interim force is a new light armored vehicle, recently named the "Stryker." Congress has supported the interim force concept, although
there has been some debate about the characteristics of the armored vehicle. In the
past, the issue was whether it should be a tracked vehicle instead of the wheeled
system the Army has selected. More recently, the issue has been whether the new
vehicle will be transportable on C-130 airlift aircraft.

The key element of the objective force is the "Future Combat System," which is an integrated suite of capabilities, including new armored systems and also
improved communications, intelligence, and surveillance capabilities. The Army's
FY2003 budget request includes funds to accelerate FCS development.

Congressional Action. Congress has generally supported the Army's modernization plan, including plans for the
interim combat brigade teams and development of the Future Combat System. But
several issues have been contentious, including funding for the Crusader artillery
system, and for some Army helicopter programs.

Crusader Artillery System. One of the most contentious issues in the defense budget this year was the fate of the Crusader
self-propelled artillery system. Advocates of defense transformation have long been
critical of the program, arguing that the 40-ton system is not readily deployable.
Supporters of the system responded that the weight has been reduced substantially
and that the system was needed to allow artillery to keep up with rapidly moving
armored forces on the battlefield. On the eve of the House Armed Services
Committee markup of the defense authorization bill, Deputy Secretary of Defense
Wolfowitz informed committee members that DOD was ordering the Army to
prepare an analysis of alternatives to the Crusader within 30 days, a step toward
canceling the $11 billion program. DOD officials later confirmed that Secretary
Rumsfeld intended to terminate the project.

The Crusader had considerable support in Congress, however. In the authorization markup the House Armed Services Committee provided the full $475.6
million for Crusader R&D that was in the Administration's February budget request.
The Committee also included language in its report on the bill, though not in the
statutory language of the measure, that prohibits a cut in funding until after a more
extensive, formal analysis of alternatives was completed, which likely would not be
until April 2003. This prompted the White House to threaten a presidential veto of
any bill if it included any statutory provisions limiting the Administration's ability
to cancel the program. The Rules Committee did not permit any floor amendments
to reduce Crusader funding.

When it marked up its version of the authorization bill on May 9, the Senate Armed Services Committee deferred action pending a committee hearing on the
Crusader. The reported bill included $475.6 million for Crusader. But when
reporting the bill, committee Chairman Carl Levin said that the committee might
offer an amendment to reduce funding when the bill is on the floor. Later, Senator
Levin said that DOD's civilian leadership had not given the Army adequate time to
review the alternatives to the Crusader that civilian officials supported.

On May 29, the Administration formally submitted an amendment to its defense budget request asking Congress to allocate the Crusader funding to other Army R&D
programs, including the Future Combat System, the Excalibur precision artillery
projectile, the Army tactical unmanned aerial vehicle, and a new precision guided
mortar munition (see Table 5).

On June 13, the Senate Armed Services Committee held a closed session to consider action on the Crusader. The committee approved an amendment that would
fence Crusader funding for 30 days after the bill is signed into law and require the
Army to complete a study of alternatives during that time. Subsequently the measure

would permit the Secretary of Defense to submit a request to the congressional
defense committees to reprogram the money into other Army indirect fire weapons
development. Senator Levin proposed the committee amendment on the floor on
June 19. Senator Warner then offered a second degree amendment to permit the
Secretary of Defense to allocate funds to other development programs without
seeking congressional permission through a reprogramming request. The Warner
amendment was agreed to by unanimous consent, and the Levin amendment, as
amended by Warner, was subsequently approved by a vote of 96 to 3.

Subsequent to House and Senate action on the defense authorization bill, however, the issue was resolved in a fashion acceptable to the Administration. In its
version of the defense appropriations bill, the House Appropriations Committee
agreed to terminate the Crusader program and to fund the alternatives that the
Administration proposed in its May 29 budget amendment. But the committee also
said that development of an alternative indirect fire system must be coupled with
development of an appropriate platform to carry a new cannon. The committee
therefore added $173 million to develop a platform and new munitions and
specifically earmarked funds for that purpose in a general provision. The general
provision also required a system to be delivered by 2008. Like the House, the Senate
Appropriations Committee added $173 million for a non-line of sight cannon to be
deployed by 2008.

The conference agreement on H.R. 4775, providing supplemental appropriations for FY2002, includes legislative language directing the Army to enter
into a follow-on contract immediately to develop and field a next generation non-line
of sight cannon artillery system by 2008. Subsequently, on July 31, August 1, and
August 2, all four of the congressional defense committees sent letters to the Defense
Department approving a DOD request to reprogram FY2002 funds from the Crusader
to the Army's Future Combat System development program.

Like the House and Senate appropriations bills, the conference agreement on the defense appropriations provides most of what the Administration proposed in its
Crusader budget amendment and adds $173 million for a non-line of sight cannon to
be deployed by 2008.

UH-60, CH-47, and TH-67 Helicopters. The defense committees took different actions
on several Army helicopter programs. The House authorization bill added $115
million for 8 additional UH-60 Blackhawk utility helicopters and one simulator and
specified what versions to buy. The House appropriations bill added funds for 4
helicopters and a simulator. The Senate authorization and appropriations bills added
$96.7 million for 9 aircraft allowing the Army to allocate the funds. The conference
report on the defense appropriations bill provides $269.9 million for 19 Blackhawks,
an increase of $116.6 million for seven additional aircraft, and, as in the House
authorization, specifies which models to procure and which components will receive
them.

Funding for the CH-47 cargo helicopter was more contentious. The House authorization added $13.5 million to the on-going modification program for
crashworthy seats. The Senate authorization as reported had $4 million for
crashworthy seats, but this was reduced in floor action as offsets for other programs.
The Senate appropriations bill added just $1 million for crashworthy seats. The
House appropriations bill, however, added $45 million to the modification plan to
increase the production rate and instructed the Army to plan to upgrade all CH-47s
to the most modern "F" version over the next several years. The appropriations
conference adds $39.1 million to support an increased production rate and directs the
Army to ensure that all requirements for upgraded aircraft are fulfilled by 2016.

The House authorization and appropriations bills and the Senate appropriations bill added funds for 6 TH-67 training helicopters. The Senate authorization provided
no funds. The appropriations conference agreement provides $9.6 million for six
aircraft.

Comanche Helicopter. The Comanche helicopter program has also been a target of criticism from some transformation
advocates. Last year, the program cost increased, the development plan was
restructured, and projected procurement was delayed. DOD reportedly considered
canceling the Comanche as one of a number of steps to reduce the procurement "bow
wave" at the end of the decade. The House Armed Services Committee included a
measure in its version of the defense authorization bill to establish a cap of $6 billion
on total engineering and manufacturing development (EMD) costs for the Comanche
- a level that now appears to be below the amount the Army is projecting for
development of just the first versions of the aircraft. The House bill also required an
annual review of the EMD program by the Defense Department's Inspector General.
In its report on the defense appropriations bill, the House Appropriations Committee
warned that its support for the Comanche program is in jeopardy because of delays
and cost growth, and the committee urged the Army to begin exploring low-cost
alternatives.

For its part, the Defense Department has also been scrutinizing the program, and in October the DOD's decision-making body, the Defense Acquisition Board,
decided to cut planned procurement of the Comanche by about half. The conference
report on the authorization bill eliminates the House cap on EMD costs and the
requirement for an Inspector General review but requires quarterly reports to
Congress on the status of the program.

Other Army Weapons Programs. There were a number of significant differences between the various bills on several
other Army programs. The House and Senate appropriations bills eliminated funds
for the Wide Area Munitions program and instructed DOD to terminate it. The
House authorization and appropriations bills added $60 million for Bradley fighting
vehicle upgrades for the National Guard, while the Senate authorization and
appropriations bills added no money. The House authorization also added $45
million to upgrade tank recovery vehicles for the National Guard. The House bills
and the Senate appropriations bill added money for up-armored HMMWVs. The
House bills both cut money for ATACMs Block II missiles, but the House
authorization added back money to upgrade some Block I missiles. The Senate
appropriations bill eliminated funds for Block II missiles. The House authorization
added $61 million for SINGCARS radios and the House appropriations added $17
million. The Senate authorization, however, cut $22.1 million that was requested for
the program in the DERF. The Senate appropriations bill provided the amount
requested, including the$22.1 million requested in the DERF. Both the House and
the Senate appropriations bills eliminated R&D funds for the Brilliant Anti-Armor
Submunition (BAT) Product Improvement Program, though neither version of the
authorization bill reduced funding. Both House bills shifted funds for PAC-3
anti-aircraft missile procurement from the Army to the Missile Defense Agency, but
the Senate bills did not.

The defense appropriations conference report terminates the Wide Area Munitions program, adds $48 million for Bradley upgrades, eliminates funds for the
ATACMS Block II, but adds money to upgrade Block I missiles, adds $11.9 million
for SINGCARS radios, provides funds for up-armored HMMWVs, and terminates
the BAT Product Improvement Program. The conference agreement also follows the
House and shifts Patriot PAC-3 procurement from the Army to the Missile Defense
Agency.

Stryker-Equipped Interim Combat Brigades. The Army now plans to outfit six brigades (a
combat division has three brigades plus support and command units) with the new
"Stryker" light armored combat vehicle. These brigades are designed to be more
rapidly deployable than heavy armored units but more capable and survivable than
light infantry or airborne units. These units are intended to be an interim approach
to transformation of the Army while development of the Future Combat System
proceeds. Recently, there have been reports that the Defense Department is
considering a measure that would reduce the number of Interim Combat Brigades to
three. This is one of many options DOD is considering in preparing the
FY2004-FY2009 defense plan. Congress has not debated any specific proposal to
reduce the number of new brigades, and the Administration has not yet decided on
the proposal. But the appropriations conference report adds $59.5 million for Stryker
brigade deployment and includes a general provision, Section 8121, that requires the
Army to budget for six brigades.

Table 6: Appropriations Action on Major Army Acquisition Programs (amounts in millions of dollars)

Navy Shipbuilding

The pace of Navy shipbuilding was a major focus of attention in Congress this year. The FY2003 budget request included funds for five new ships, far short of the
8.5 ships per year needed, in principle, to sustain a fleet of 300 ships, which has long
been the Navy's goal.

Congressional Action. The House Armed Services Committee provided funds to procure an additional DD-51 destroyer
on condition that the Justice Department reach as settlement with General Dynamics
Corporation in the long-standing A-12 termination lawsuit. The tentative settlement
would have provided $385 million in advance procurement for Virginia-class
submarine acquisition. By the time the authorization and appropriations conference
agreements were being negotiated, however, that settlement had failed.

In the absence of a settlement, the House authorization added $810 million to be distributed among several shipbuilding programs, including $415 million for
Virginia class submarine advance procurement, $210 million for cruiser conversion
advance procurement, and $185 million for a nuclear submarine refueling overhaul.
The committee also added funds to accelerate procurement of the next aircraft carrier,
the CVN(X). The Navy plan to procure the ship had slipped by one year, with half
the funding to be requested in FY2007 and the remainder in FY2008. The committee
added $229 million in advance procurement to accelerate production and instructed
the Navy wants to move the start date back to FY2006.

The Senate Armed Services Committee also added a significant amount for Navy shipbuilding, including $690 million that Senator Levin said was transferred
from missile defense R&D. The committee additions included $415 million in
advance procurement for Virginia-class attack submarines, $200 million for refueling
rather than retiring an SSN-688 Los Angeles-class attack submarine, $150 million
in advance procurement for LPD-17 amphibious ships, and $125 million in advance
procurement for DDG-51 destroyers. Like the House Armed Services Committee,
the Senate Armed Services Committee provided $229 million to accelerate CVN(X)
procurement.

The House Appropriations Committee took a substantially different approach to shipbuilding in general and to aircraft carrier procurement in particular. Rather
than provide money to accelerate CVN(X) procurement, the committee added $250
million for the CVN-77 carrier, which is now being built, and instructed the Navy to
incorporate a more advanced radar and other electronic systems into the ship as a
transition to the CVN(X). The committee did not add money for other major
shipbuilding programs, and it eliminated $253 million requested for the LHD-8
amphibious assault ship - this ship was started in FY2001 and is being incrementally
funded through FY2006.

The Senate Appropriations Committee added a substantial amount for shipbuilding, but it allocated funding quite differently from the other committees.
The committee added $530.9 million to cover cost overruns on LPD-17 amphibious
ships, DDG-51 destroyers, and Virginia-class submarines approved in prior years,
while it reduced funding requested for advance procurement for the same programs.
The committee also criticized the Navy for overusing advance procurement, saying
that it should only be employed for long lead components of ships and that it should
not comprise as large a share of the total cost of ships as it has in recent years. The
committee also added $306 million to pay for the cost of an agreed transfer of work
on LPD-17s and DDG-51s between the two major shipbuilders. Like the authorizing
committees, the committee provided $229 million to accelerate CVN(X) procurement
and about $200 million for an SSN-688 attack submarine refueling overhaul.

The appropriations conference report adds $90 million, rather than the $250 million in the House bill, to incorporate advanced electronics on CVN-77. The
conference report provides $160 million, rather than the $229 million in the Senate
bill, to restore the CVN(X) procurement schedule. As in the Senate bill, the
conference report provides $530.9 million in added money for prior year cost growth.
The agreement provides $243 million for LHD-8, rejecting the House reduction. As
in the Senate bill, the agreement provides $165 million for an additional SSN-688
refueling overhaul.

After congressional action on the authorization and appropriations bills was well underway, a new issue arose when the Navy announced that it planned to accelerate
development of a new, smaller vessel called the Littoral Combat Ship (LCS). The
LCS program was one element of the Navy's plan to develop a series of new ships
under the DDX program that was announced in 2001 after the DD-21 destroyer
program was canceled. During the summer of 2002, the Navy said it wanted to
pursue the LCS more rapidly, and it informally asked Congress for additional money
to begin studying alternatives. The Senate report on the authorization bill included
$4 million for the program. The program had not undergone the review process that
has normally been part of the acquisition process, however, which includes, among
other things, a formal assessment of requirements for a new system, projections of
the program schedule and costs, and an analysis of alternatives. The defense
authorization conference report provides $4 million for the program, but it includes
a long discussion of the need for a thorough review of program requirements and
alternatives, and it requires DOD and the Navy to report to Congress on the
assessments that had previously been required under DOD acquisition regulations.

Aircraft Programs

Funding for several major aircraft programs was included in the FY2003 Administration request, including Marine Corps V-22 tilt rotor aircraft development
and procurement; Air Force F-22 fighter development and procurement; Air Force
and Navy F-35 Joint Strike Fighter development; Navy F/A-18E/F multirole fighter
procurement; and C-17 cargo aircraft procurement. The Navy has reportedly been
considering reducing future planned F-35 procurement, but this has not affected
congressional support for the program to date.

Congressional Action. Both the House and Senate Armed Services Committees approved requested funding for most
major aircraft programs, including the F-22, F-35, V-22, and C-17. The House
Armed Services Committee added funds for a few lower profile programs, including
trainer aircraft, Navy helicopters, and F-15 communications upgrades. The Senate
Armed Services Committee added funds to procure an additional 4 F/A-18EF
fighters for the Navy and Marine Corps. Both committees added funds for EA-6B
electronic warfare aircraft upgrades. The House Appropriations Committee added
funding for F-22 R&D, but otherwise made few changes in the request for major
aircraft programs. The Senate Appropriations Committee added funds for 4
additional F/A-18E/F fighters. The committee also added money to fully fund
procurement of C-17 aircraft.

The appropriations conference report adds $120 million for 2 additional F/A-18E/F aircraft, half as many as in the Senate bill. The committee also added
money to fully fund C-17 procurement.

C-17 Funding Profile. One rather technical, but potentially significant issue this year was whether the funding approach
that the Air Force proposed for future C-17 procurement sets a precedent that would
erode DOD policies designed to promote long-term fiscal discipline. In the past,
DOD typically requested enough money to procure a specific number of fully
equipped end-items - funding requested for 15 C-17 aircraft, for example, would be
sufficient to buy 15 deployable aircraft. This year, however, the Air Force requested
only enough money to finance progress payments on a new 5-year contract for
multi-year procurement of the aircraft. The effect is to reduce amounts requested
early in the multi-year contract and increase costs in the later years.

This is technically at odds with longstanding DOD policy which calls for full funding of the cost of end-items being requested in any given year, and it is the first
time a significant breach of the full funding policy has occurred in an area apart from
Navy shipbuilding. (For an extensive discussion, see CRS Report RL31404, Defense
Procurement: Full Funding Policy - Background, Issues, and Options for Congress,
by [author name scrubbed] and [author name scrubbed].)

The House Armed Services Committee approved the requested C-17 procurement profile, but warned DOD against using this funding approach in the
future. The House Appropriations Committee rejected the Air Force approach and
required the Air Force to use C-17 funding in FY2004 to procure complete aircraft.
The committee also instructed the Defense Department to restructure future funding
plans for the C-17 to use full funding. The Senate Appropriations Committee
specifically rejected the Air Force's incremental funding approach and instead added
$585.9 million to finance the full cost of procuring 15 aircraft. The appropriations
conference agreement mandates full funding of the C-17 - as in the Senate bill, it
adds $585.9 million for full funding in FY2003, and it retains House language
instructing the Air Force to request full funding in the future.

Tanker Aircraft Leasing. Last year, the conference report on the defense appropriations bill included a provision allowing
the Air Force to pursue negotiations with the Boeing Corporation to lease tanker
aircraft for a ten-year period. The provision was structured so that the aircraft would
be returned to the manufacturer after the lease expired. As a result, the lease is
considered an "operating lease" rather than a "lease-purchase" agreement, so that
only the annual cost of actual payments on the lease would be scored in the Air Force
budget on a year-to-year basis - otherwise, the full cost of the contract would have
to be scored in the years when the money would be obligated. Boeing has offered to
lease 100 767 aircraft as tankers.

Senator McCain and some others have objected to the leasing provision, arguing that it will cost the government more in the long run than simply procuring additional
tanker aircraft. Both the Office of Management and Budget and the Congressional
Budget Office have prepared analyses which project considerably higher costs for
leasing than for regular procurement. (The text of the CBO letter is available
electronically at ftp://ftp.cbo.gov/34xx/doc3413/tankers.pdf.) Mitch Daniels, the
Director of OMB, has criticized the plan, insisting that it will be cheaper either to buy
new tankers or to re-engine older aircraft. In its markup of the defense authorization
bill, the Senate Armed Services Committee approved an amendment proposed by
Senator McCain that would require Congress to authorize and appropriate funds for
any tanker lease agreement. In floor action on the defense appropriations bill,
however, Senator McCain offered but then withdrew a similar amendment. Recently,
the Air Force has reported that it is very close to reaching an agreement with Boeing
on the tanker leases.

The appropriations conference agreement provides $3 million for the tanker lease program (in Operation and Maintenance, Air Force). The agreement also
includes a general provision, Section 8117, that provides that payment for tanker
leases may be made one year in advance and that permits funds either for
procurement of aircraft or for operation and maintenance to be used for the leases.
On October 16, Senator McCain made a floor statement that was strongly critical of
the leasing provisions in the conference report (Congressional Record, pp.
S10519-10520).

The authorization conference report includes a provision (Section 133) revising Senator McCain's amendment. The revised provision prohibits the leasing
agreement unless funds have been specifically authorized and appropriated for the
program, or unless a reprogramming notification has been submitted to the
congressional defense committees. In report language, the conference agreement
says that it expects the Secretary of Defense to seek congressional approval for a new
tanker lease.

Table 8: Appropriations Action on Major Aircraft Programs (amounts in millions of dollars)

Notes: Funding for 4 KC-130Js was requested in the Defense Emergency Response Fund
(DERF). B-2 request
includes $50 million for R&D requested in the DERF.

Missile Defense

The Administration requested $7.8 billion for missile defense programs in FY2003. The request included

$3.2 billion for mid-course defenses, including funds for the National Missile Defense program to develop ground-based systems to protect the
entire United States, and the Navy Theater Wide program, which is a theater defense
system to be based on navy ships;

$1.1 billion for battle management and related support
programs;

$935 million for the ground-based Theater High Altitude Area
Defense (THAAD) system;

$858 million for Patriot PAC-3 development and procurement;

$797 million for boost phase defense systems, including the
Airborne Laser (ABL) and the Space-Based Laser (SBL); and

$373 million for space-based sensors, including the
Space-Based Infrared System-Low (SBIRS-Low);

an additional $815 million in the Air Force budget for the
Space-Based Infrared System-High (SBIRS-High).

The SBIRS-High program has experienced very large cost increases, and early in the year, the program was under review because the cost growth violated Nunn-McCurdy
cost cap provisions. DOD decided to continue the program, however, though its
status remains a matter of concern. There continues to be extensive debate in
Congress about the status of the National Missile Defense program, which the
Administration has tried to accelerate, and about space-based systems like the SBL.

Congressional Action. The House Armed Services Committee generally supported the Administration's request. The
committee reduced funding for the ABL (now funded under the title "Air-Based
Boost" defense) by $77.5 million, on the premise that a second test aircraft, that was
included in the request, may not yet be needed. That judgment was disputed in
House floor action on the defense appropriations bill (discussed below). The
committee distributed the savings to a number of other missile defense programs.
The House Armed Services Committee also refused to fund Patriot PAC-3 or
Medium Extended Air Defense System (MEADS) development in the Army budget,
as requested, but instead shifted the money back to the Missile Defense Agency.

During the House Armed Services Committee markup, Representative Spratt offered an amendment to reduce funding for the SBL and for space-based kinetic
interceptor development and to transfer the savings to the PAC-3 and Arrow theater
missile defense programs. The amendment was defeated in the committee. On the
floor, the House approved an alternative offered by Representative Hunter to add
funds for PAC-3 and Arrow to be financed from funds available to the Missile
Defense Agency, but without specifying the offsetting source of funds.

In committee markup, Representative Spratt also offered an amendment to prohibit deployment of nuclear tipped interceptor missiles for missile defense, which
was rejected. On the floor, the Rules Committee did not make in order an
amendment on the issue, but Representative Spratt offered a motion to recommit the
bill to committee with instructions to prohibit nuclear interceptor development, and
that motion was defeated.

The Senate Armed Services Committee reduced overall missile defense funding by $814.3 million (see Table 9 for a detailed tabulation of funding), prompting
several Republicans on the committee to vote against reporting the bill. Most of the
reductions were in systems engineering and other support activities, which the
committee argued are not adequately justified in support material provided by DOD.
This became a major issue on the Senate floor. The Senate Armed Services
Committee also reduced ABL funding by $135 million and SBIRS-High funding by
$100 million.

In addition, the committee approved several provisions designed to require stricter oversight of missile defense programs and adherence to more traditional
acquisition procedures in the development programs. One provision would require
the independent Director of Operational Test and Evaluation to conduct an annual
assessment of specific missile defense programs. Another provision requires the
Secretary of Defense to provide annual schedule and cost estimates for major
elements of the program to Congress.

On June 12, Secretary Rumsfeld send at letter to Senator Levin opposing the Senate Armed Services Committee reduction in missile defense funding and
objecting to the committee's provisions regarding acquisition procedures. The
committee's measures, said Rumsfeld, "would impose a number of burdensome
statutory restrictions that would undermine our ability to manage the program
effectively." The Secretary said he would recommend a veto if a final authorization
bill includes either the Senate cuts in missile defense funding or the Senate
provisions regarding management of the program. OMB's June 19 "Statement of
Administration Policy" repeated the veto threat.

On June 26, the Senate approved an amendment offered by Senator Warner, with a second degree amendment by Senator Levin, to restore some or all of the
missile defense funding that the committee cut. The amendment would permit the
President to allocate up to $814.3 million of anticipated inflation savings either to
missile defense or to counter-terrorism programs. The Levin amendment stipulates
that priority should be given to counter-terrorism. The Senate did not consider any
measures to revise committee provisions on program management.

Also on June 26, the Senate approved an amendment proposed by Senators Feinstein and Stevens to prohibit development or deployment of nuclear armed
interceptors for missile defense. This measure is similar to the Spratt amendment
that the House turned down.

The House Appropriations Committee made a number of changes in requested missile defense funding. The committee denied funding for Navy sea-based terminal
defense, a replacement for the terminated Navy Area Defense program, saying that
DOD had not presented a plan for using the research funds. The committee also
denied funding for the Russian-American Observation Satellite Program (RAMOS)
because the Russian government has not yet responded to a U.S. proposal to
implement the program. The committee said it would revisit the issue in conference
if the two governments sign an agreement. The committee also cut funding for
sea-based and space-based boost phase defenses, saying that requested large increases
in funding were not justified in view of requirements for near term programs like the
PAC-3 system. The committee added $30 million for additional PAC-3 testing and
required a report on planned testing of the Theater High Altitude Area Defense
(THAAD) system.

In floor action, the House approved an amendment by Representative Spratt to reduce funding for the space-based kinetic interceptor program by $30 million and
shift the funds to the Airborne Laser program.

The Senate Appropriations Committee largely followed the Senate authorization bill. In a general provision, it provided an additional $814.3 million for missile
defense or for counter-terrorism programs, offset by anticipated inflation savings.
The provision also itemized the programs to and amounts for which funds are to be
restored, should the President choose to allocate these funds to missile defense.

The appropriations conference report provides most of what the Administration requested for missile defense. In all, it reduced funding by $43 million. It added $45
million for Patriot PAC-3 procurement (offset by a $25 million reduction in support
funding) and $70 million for the U.S.-Israeli Arrow program. It reduced funding for
RAMOS but did not eliminate it as in the House bill.

The authorization conference report includes revised provisions governing management of missile defense programs. It requires that DOD submit annual
reports to Congress on performance goals and development baselines for each
development block of each missile defense system as part of annual budget
justification material; it requires year-by-year funding profiles for each block of each
system that could be fielded; and it requires the Defense Department's Joint
Requirements Oversight Council (JROC), which is chaired by the Deputy Chairman
of the Joint Chiefs, to provide to Congress a one-time review of cost, schedule, and
performance criteria. The agreement also requires that DOD provide a life-cycle cost
estimate for the Theater High Altitude Area Defense (THAAD) program - the Senate
had prohibited obligation of more than 50% of the money authorized for THAAD
until the report is submitted, while the conference agreement permits 85% to be
obligated. The conference report also requires the director of the Missile Defense
Agency to provide reports to Congress on each flight test of the Ground-Based
Mid-Course National Missile Defense System. The authorization conference
agreement drops provisions in the Senate bill requiring annual JROC reviews of
missile defense programs and operational assessments of some programs by the
Director of Operational Test and Evaluation.

The authorization conference report also prohibits the use of FY2003 funds for development of a nuclear-armed interceptor for missile defense - the Senate version
of the bill had flatly prohibited development.

Table 9: Congressional Action on Missile Defense Funding by
Program Element and Project (millions of dollars)

*Note: Warner/Levin amendment to the Senate authorization bill provides up to $814.3
million for
missile defense and counter-terrorism programs.

Strategic Nuclear Weapons Policy

In January, the Administration completed a congressionally mandated Nuclear Posture Review and submitted a classified report on the review, with an unclassified
summary, to Congress. Parts of the classified report were later leaked to the press,
prompting considerable public debate about several issues, including the potential
use of nuclear weapons against non-nuclear states that use or threaten to use
non-nuclear weapons of mass destruction, plans to shorten the time needed to resume
nuclear testing, and potential development of new nuclear weapons for missions such
as destruction of deeply buried and hardened targets. The review also reaffirmed
Administration plans to reduce offensive nuclear warhead numbers. Later, on May
13, the White House announced an agreement with Russia on a treaty to reduce
strategic offensive force levels to between 1,700 and 2,200 warheads.

Congressional Action. In the House Armed Services Committee markup, Representative Tauscher offered an
amendment to limit strategic nuclear force levels to 1,700. The proposal was rejected
in committee. On the floor, the House approved a Tauscher amendment to require
a report on options for achieving a level of 1,700 to 2,200 warheads. Representative
Spratt offered an amendment, also rejected in committee, to require one-year advance
notification of a decision to resume nuclear testing. The Rules Committee did not
permit a floor vote on the amendment. The full House also rejected an amendment
offered by Representative Markey to prohibit development of a nuclear earth
penetrator weapon.

The Senate Armed Services Committee version of the authorization eliminates $15.5 million requested in the Department of Energy weapons budget for
development of a "Robust Nuclear Earth Penetrator" warhead and requires a detailed
report on the proposed program. On July 26, the Senate approved an amendment to
the bill, offered by Senators Feinstein and Stevens, to prohibit development or
deployment of nuclear armed interceptors for missile defense (see the discussion of
missile defense programs, above).

The Senate bill also includes a provision that would require the Secretary of Energy to request funds before beginning research and development or production
of any new or modified nuclear weapon. The provision also requires a specific
authorization for a new or modified nuclear weapon program before funds could be
obligated or expended.

The authorization conference report provides funds for the Robust Nuclear Earth Penetrator warhead but prohibits obligation of the money until 30 days after Congress
receives the report required by the Senate version of the bill. The conference
agreement also includes a revised version of the Senate requirement that the
Department of Energy specifically request funds to develop any new nuclear
weapons. The conference report also requires a report on options for resuming
nuclear testing.

Environmental Restrictions on DOD Training

The Defense Department has voiced increasing concern in recent years about the effect on training of environmental regulations. Shortly before the House Armed
Services Committee markup of the defense authorization bill, the Administration
proposed legislation to exempt DOD training activities from the requirements of
several environmental statutes ranging from the Endangered Species Act to the Clean
Air Act.

Congressional Action. The House-passed version of the authorization bill includes provisions exempting DOD
from or waiving application of the Endangered Species Act, the Migratory Bird
Treaty Act, and the Wilderness Act to areas used for military training exercises. On
the Endangered Species Act, Section 312 of the House bill would allow DOD to
substitute its own Integrated Natural Resource Management Plan to protect
endangered species rather than having installations designated as a critical habitat.
DOD would, however, still be prohibited from taking any actions that would harm
endangered or threatened species. In designating new critical habitats, the bill would
also require that the effect on national security, as well as the economic impact, must
be considered.

Section 311 of the House bill provides that in the case of military training activities, DOD would not be subject to the part of the Migratory Bird Treaty Act
that designates certain types of activities as unlawful. According to the committee
report, this provision was intended to permit DOD to carry out military exercises
even if they might unintentionally harm migratory birds. The language adopted
would exempt DOD more broadly from any activity deemed to be unlawful under the
Act.

The House bill also permits DOD to conduct training activities and have emergency access to the Utah Test and Training Range, despite the fact that a portion
of that range has been designated as a wilderness area with certain restrictions on
noise and disturbances. The House bill also includes provisions that would designate
several areas owned by the Bureau of Land Management that are adjacent to the Utah
Test and Training Range as wilderness areas although DOD's training activities in
these areas would also not be covered by Wilderness Act restrictions. (For a
discussion of these and other provisions, see CRS Report RL31456, Defense Cleanup
and Environmental Programs: Authorization and Appropriations for FY2003, by
David Michael Bearden, and CRS Report RL31415, The Endangered Species Act,
Migratory Bird Treaty Act, and Department of Defense Readiness Activities: Current
Law and Legislative Proposals, by [author name scrubbed].)

The House Armed Services Committee did not address other environmental
measures that DOD included in its legislative proposal. In the House Armed
Services Committee markup, Representative James Maloney offered an amendment
to remove the environmental waiver provisions, but the proposal was rejected. The
Rules Committee did not permit a similar amendment proposed by Representatives
Rahall, Dingell and Maloney to be offered on the floor.

The Senate Armed Services Committee did not address these environmental issues in its version of the authorization bill. Instead, it referred the Administration's
proposals to the Environment and Public Works Committee, which recently held a
hearing on those proposals. The Senate bill authorizes $20 million to allow the
Secretary of Defense to acquire lands adjacent to military installations to serve as a
buffer zone and provide additional natural habitat areas for endangered species in
areas where animals have moved to military installations as a result of development.

The authorization conference report includes a revised version of the House provision regarding the Migratory Bird Treaty Act. The House provision would have
altered the Act to exempt military training from certain provisions. The conference
revision temporarily exempts training activities and requires the Secretary of the
Interior to prescribe regulations to exempt DOD.

The conference report does not include the House provision regarding the Endangered Species Act, but it includes without change the House provisions
regarding the Utah Test and Training Range.

Cap on Military Personnel in Colombia

Under current law, there is a cap of 400 on the number of U.S. military personnel who can operate in Colombia. The cap specifically excludes personnel
serving diplomatic functions or performing emergency missions. The House
authorization bill included a provision that would establish a cap of 500 on the
number of U.S. military personnel in Colombia who are supported or maintained by
Department of Defense funds. The measure also would permit the Secretary of
Defense to waive the cap for national security reasons and provided he informs
Congress within 15 days of a waiver. The authorization conference report does not
include the House provision.

Base Realignment and Closure

Last year, Congress approved a measure that will permit a new round of military base closures in 2005, following procedures that were used in earlier rounds in 1991,
1993, and 1995. In the House Armed Services Committee markup of the
authorization bill, Representative Taylor offered an amendment to repeal last year's
base closure provisions. The committee defeated the amendment by a vote of 38-19.
The Rules Committee did not allow the amendment to be offered on the floor, which
was a matter of considerable contention when the bill was debated.

Abortions in Military Hospitals Overseas

Abortions are readily available in the United States, but are often not available to U.S. personnel deployed abroad. Congress has perennially debated measures to
allow abortions for U.S. military personnel at military hospitals overseas.

Congressional Action. In the House Armed Services Committee markup, the committed rejected an amendment
by Representative Sanchez to allow abortions at U.S. military hospitals abroad; the
full House rejected the proposal in a floor vote. On June20 the Senate debated and
on June 21 approved by a vote of 52-40 an amendment to the authorization bill by
Senators Murray and Collins that would remove the prohibition on privately funded
abortions at overseas military facilities. The authorization conference report drops
the Senate provision.

Limitation on Transfer Authority

Like other House FY2003 appropriations bills, the House-passed measure includes a provision, Section 8122, that prohibits the transfer of funds to any other
agency unless approved in an appropriations act. One effect would be to prevent the
transfer of defense funds to the new Department of Homeland Security without the
approval of the appropriations committees. That provision is not included in the
appropriations conference agreement.

Legislation

Congressional Budget Resolution

A concurrent resolution establishing the congressional budget for the United
States government for fiscal year 2003 and setting forth appropriate budgetary levels
for each of fiscal years 2004 through 2007. Reported by the House Budget
Committee (H.Rept. 107-376), March 15, 2002. Passed by the House, 221-209,
March 20, 2002.

S.Con. Res. 100 (Conrad)

An original concurrent resolution setting forth the congressional budget for the
United States government for fiscal year 2003 and setting forth the appropriate
budgetary levels for each of the fiscal years 2004 through 2012. Reported by the
Senate Budget Committee, March 22, 2002. Written report filed (S.Rept. 107-141),
April 11, 2002.

Defense Authorization

A bill to authorize appropriations for fiscal year 2003 for military activities of
the Department of Defense, and for military construction, to prescribe military
personnel strengths for fiscal year 2003, and for other purposes. Marked up and
ordered to be reported by the House Armed Services Committee, May 1, 2002.
Report filed (H.Rept. 107-436), May 3, 2002. Considered by the House and
approved, with amendments (359-58), May 10, 2002. Laid before the Senate, Senate
struck all after the enacting clause and substituted the language of S. 2514, and passed by the Senate by unanimous consent, June 27, 2002. Conference
report filed (H.Rept. 107-772), November 12. Conference report agreed to in the
House on suspension of the rules by voice vote, November 12. Conference report
agreed to in the Senate by voice vote, November 13.

A bill to authorize appropriations for the costs of the war against terrorism.
Considered by the House Armed Services Committee, May 1, 2002. Marked up and
ordered reported by the House Armed Services Committee July 18, 2002. Report
filed (H.Rept. 107-603), July 23, 2002. Considered under suspension of the rules,
yeas and nays ordered, and further consideration postponed, July 23-24, 2002.
Approved by the House (413-3), July 24, 2002.

An original bill to authorize appropriations for fiscal year 2003 for military
activities of the Department of Defense, for military construction, and for defense
activities of the Department of Energy, to prescribe personnel strengths for such
fiscal year for the Armed Forces, and for other purposes. Marked up and ordered to
be reported by the Senate Armed Services Committee, May 9, 2002. Report filed
(S.Rept. 107-151), May 15, 2002. Considered by the Senate, June 18, 19, 20, 21, 24,
25, 26, 27. Approved by the Senate as amended (97-2), June 27, 2002.

Defense Appropriations

Making appropriations for the Department of Defense for the fiscal year ending
September 30, 2003, and for other purposes. Marked up and reported by the House
Appropriations Committee (H.Rept. 107-532), June 25, 2002. Considered by the
House and approved as amended (413-18), June 27, 2002. Marked up and reported
as amended by the Senate Appropriations Committee (S.Rept. 107-213), July 18,
2002. Considered by the Senate July 31 and August 1, 2002. Approved by the
Senate, as amended (95-3), August 1, 2002. Conference report filed (H.Rept.
107-732), October 9, 2002. Conference report agreed to in the House (409-14),
October 10, 2002. Conference report agreed to in the Senate (93-1), October 16,
2002. Signed into law October 23, 2002.

Making appropriations for military construction, family housing, and base
realignment and closure for the Department of Defense for the fiscal year ending
September 30, 2003, and for other purposes. Marked up and reported by the House
Appropriations Committee (H.Rept. 107-533), June 25, 2002. Considered by the
House and approved, as amended (426-1), June 27, 2002. Senate struck all after the
enacting clause and substituted the text of S. 2709, as reported, July 17,
2002. Approved by the Senate, with an amendment (96-3), July 18, 2002.
Conference report filed (H.Rept. 107-731), October 9, 2002. Conference report
agreed to in the House (419-0), October 10, 2002. Conference report agreed to in the
Senate by unanimous consent, October 11, 2002. Signed into law October 23, 2002.

An original bill making appropriations for military construction, family housing,
and base realignment and closure for the Department of Defense for the fiscal year
ending September 30, 2003, and for other purposes. Marked up and ordered to be
reported by the Senate Appropriations Committee, June 27, 2002. Report filed
(S.Rept. 107-202), July 3, 2002.

FY2002 Supplemental Appropriations

Making supplemental appropriations for the fiscal year ending September 30,
2002, and for other purposes. Reported by the House Appropriations Committee
(H.Rept. 107-180), May 20, 2002. Considered by the House, May 22-23, 2002.
Approved by the House (280-138), May 24, 2002. Measure laid before the Senate
and Senate struck all after the enacting clause and substituted the language of
S. 2551 to be used as original text, June 3, 2002. Cloture motions
presented in the Senate, June 4, 2002. Cloture motion invoked (87-10), June 6, 2002.
Approved by the Senate (71-22), June 7, 2002. Conference agreement reported
(H.Rept. 107-593), July 19, 2002. Conference report agreed to by the House
(397-32), July 23, 2002. Conference report agreed to by the Senate (92-7), July 24,
2002. Signed into law August 2, 2002.

An original bill making supplemental appropriations for further recovery from
and response to terrorist attacks on the United States for the fiscal year ending
September 30, 2002, and for other purposes. Marked up and ordered to be reported
by the Senate Appropriations Committee, May 22, 2002. Written report filed
(S.Rept. 107-156), May 29, 2002.

Appendix A: What the Defense Authorization and Appropriations Bills Cover

Congress provides funding for national defense programs in several annual
appropriations measures, the largest of which is the defense appropriations bill.
Congress also acts every year on a national defense authorization bill, which
authorizes programs funded in all of the regular appropriations measures. The
authorization bill addresses defense programs in almost precisely the same level of
detail as the defense-related appropriations, and congressional debate about major
defense policy and funding issues usually occurs mainly in action on the
authorization. Because the defense authorization and appropriations bills are so
closely related, this report tracks congressional action on both measures.

The annual defense appropriations bill provides funds for military activities of the Department of Defense (DOD), including pay and benefits of military personnel,
operation and maintenance of weapons and facilities, weapons procurement, and
research and development, as well as for other purposes.

Most of the funding in the bill is for programs administered by the Department of Defense, though the bill also provides (1) relatively small, unclassified amounts
for the Central Intelligence Agency retirement fund and intelligence community
management, (2) classified amounts for national foreign intelligence activities
administered by the CIA and by other agencies as well as by DOD, and (3) very small
amounts for some other agencies. Five other appropriations bills also provide funds
for national defense activities of DOD and other agencies including:

the military construction appropriations bill, which finances construction of military facilities and construction and operation of military family
housing, all administered by DOD;

the energy and water development appropriations bill, which funds atomic energy defense activities administered by the Department of
Energy;

the VA-HUD-independent agencies appropriations bill, which finances civil defense activities administered by the Federal Emergency Management
Agency, activities of the Selective Service System, and DOD support for National
Science Foundation Antarctic research;

the Commerce-Justice-State appropriations bill, which funds national security-related activities of the FBI, the Department of Justice, and some
other agencies; and

the transportation appropriations bill, which funds some defense-related activities of the Coast Guard.

Appendix B: Overview of the Administration Request

On February 4, 2002, the Administration submitted its formal FY2003 budget
request to Congress. The Administration proposed $396.8 billion for the national
defense budget function, about $46 billion above the estimated FY2002 level (not
including supplemental FY2002 appropriations of $14 billion proposed on March
21). (2) The increase between FY2002 and FY2003
is the largest since at least the first
years of the Reagan Administration. And with supplemental counter-terrorism
funding for FY2001 and FY2002 included, the total increase in defense in the last
year is the largest, in inflation-adjusted dollars, since the Vietnam War. The
Administration projects continued growth in defense through FY2007, though at a
much more modest pace - Table B1 shows the long term trend in defense spending
under the Administration's plan.

The large increase requested for defense has not been enough, however, to allay the concerns of defense advocates in Congress. In their view, the budget is not
adequate to accommodate needed increases in weapons procurement. In the House,
several Members threatened to vote against the proposed budget resolution because
it set aside $10 billion for defense in a reserve fund available only for costs of the
global counter-terrorism campaign. The Administration requested the $10 billion as
an unallocated contingency fund for costs of counter-terrorism operations in FY2003,
but several members of the Armed Services Committees both in the House and in the
Senate have said they would prefer using that money to increase spending on major
weapons programs, especially shipbuilding.

Sources: U.S. Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2003, February 2002. Constant dollar figures
are CRS calculations using deflators from DOD Comptroller.

Notes: This and other tables in this report use OMB data that reflect enacted and proposed changes in accounting for retirement benefits. Figures reflect (1) enacted
accrual accounting for health care benefits for over-65 military retirees beginning in
FY2003; (2) proposed accrual accounting for health care benefits for under-65 military
retirees beginning in FY2004; and (3) proposed accrual accounting for all civilian
retirement pension and health benefits beginning in FY2003. OMB has also adjusted
FY2001 and FY2002 to be consistent with FY2003 and later treatment of civilian
retirement benefits. Data in these tables also reflect OMB scoring of funds provided in
the Emergency Terrorism Response (ETR) supplemental appropriations act approved
in September 2001. OMB figures do not show the allocation of $9.8 billion of funding
provided for defense in the ETR supplemental.

The Impact of Accrual Accounting for Military and Civilian Personnel Retirement Benefits on the Defense Budget

One important complicating element in the FY2003 defense budget is a series of changes in accounting for military and civilian personnel retirement benefits.
Most federal retirement benefits, including benefits for uniformed military service
members and DOD civilian personnel, have long been funded on the basis of
"accrual accounting," in which the cost of future benefits for current employees is
charged to the employing agency as the benefits are accrued. Under accrual
accounting procedures, federal agencies pay the actuarily determined cost of future
benefits into a fund. Payments to retirees are then charged to the fund, not to the
agency. In the FY2003 and FY2004 defense budgets, three substantial adjustments
involving accrual accounting have a large effect on budget totals. These are:

Accrual accounting for over-65 health care benefits for uniformed personnel: The FY2001 Defense Authorization Act, P.L. 106-398,
included a provision, known as "Tricare-for-Life," that guarantees DOD-provided
health care to 65-and-over military retirees and their dependents. Beginning in
FY2003, these benefits are being funded on an accrual basis. This results in (1) an
increase of $8.1 billion in FY2003 in the military personnel accounts to reflect the
accrual cost of future benefits for current uniformed personnel and (2) a reduction of
$5.6 billion in operation and maintenance accounts to reflect a payment from the
health care trust fund to DOD for providing care to over-65
retirees.

Accrual accounting for all civilian personnel retirement pension and health benefits: While most federal civilian retirement benefits have
been funded on an accrual basis, a small part has not been. The Administration has
proposed funding all retirement benefits on an accrual basis. In FY2003, the
proposed change results in an increase of $3.4 billion (both in budget authority and
in outlays) in the Department of Defense budget. OMB has adjusted FY2001 and
FY2002 figures - though not figures for earlier years - to be comparable to the new,
proposed treatment of civilian retirement and health benefits. Thus, OMB figures
include $3.0 billion in FY2001 and $3.2 billion in FY2002 Department of Defense
budget totals (both in budget authority and in outlays) for increased civilian
retirement accrual even though this accounting procedure was not in place in those
years.

Accrual accounting for under-65 health care benefits for uniformed personnel: Beginning in FY2004, the Administration is also proposing
to finance health care benefits for under-65 military retirees on an accrual basis, in
which, again, DOD would pay into a fund the cost of future benefits for current
employees and would receive reimbursement from the fund for costs of under-65
retiree health care that it provides. Both the contributions to the fund and
reimbursements from the fund are reflected in budget projections from FY2004
on.

Table B2 shows the year-by-year impact of these changes in accrual accounting on the defense budget through FY2007.

Table B2. Effects of Accrual Accounting on the Defense Budget (millions of dollars)

<center>

2003

2004

2005

2006

2007

DOD Payments to Accrual Funds

Payments for Accrual of Benefits for
65-and-Over Health

8,102

8,618

9,151

9,720

10,338

Payments for Accrual of Civilian Benefits

3,356

3,629

3,781

3,938

4,114

Payments for Accrual of Benefits for Under-65
Health

-

6,484

6,889

7,319

7,778

Total Payments to Funds

11,458

18,731

19,821

20,977

22,230

Receipts by DOD for Provision of Services

Receipts for 65-and-Over Health Care

5,634

5,986

6,361

6,758

7,180

Receipts for Under-65 Health Care

-

5,579

5,928

6,299

6,692

Total Receipts from Funds

5,634

11,565

12,289

13,057

13,872

Net Effect on DOD Budget

+5,824

+7,166

+7,532

+7,920

+8,358

</center>

Source: Office of Management and Budget.

"Must Pay" Bills in the Defense Budget

The cost of changes in accrual accounting is only one of a number of so-called "fact of life" or "must pay" bills in the FY2003 defense budget. Much of the
FY2002-2003 budget increase is taken up by accounting changes, inflation, pay
raises, changes in weapons cost estimates, and costs of the global counter-terrorism
campaign rather than by increases in weapons investment. DOD Comptroller Dov
Zakheim has told congressional committees that such "must pay" bills leave less than
$10 billion for new initiatives.

According to the Defense Department, increased costs include:

$6.7 billion for inflation;

$2.7 billion for pay raises;

$8.1 billion for accrual payments for 65-and-over health care
benefits for current uniformed personnel when they retire (discussed
above);

$7.4 billion for what DOD calls "realistic costing," half for
revised estimates of weapons costs (including the F-22 fighter and already contracted
Navy ships) and half for closer to full funding of projected operating costs;
and

$19.4 billion for counter-terrorism, including $10 billion in an
unallocated contingency fund for continuing the war and $9.4 billion for specific
costs associated with ongoing operations.

In all, this adds up to $47.5 billion in new costs, but the total is offset by $9.3 billion in savings from procurement programs that were in the FY2002 budget but are not
in the FY2003 plan. So an increase of almost $50 billion in the defense budget, by
this account, still leaves relatively little available for new programs.

Although the point is generally well taken, some items are missing from the arithmetic. For one thing, DOD is receiving $5.6 billion in payments from the retiree
health care trust fund in FY2003 to cover costs of providing services to 65-and-over
retirees - money it did not receive in FY2002. Also, some counter-terrorism costs
were included in the FY2002 budget, so the increased cost in FY2003 is $16 billion
rather than $19 billion. Moreover, OMB budget figures (though not some of the
figures DOD used in its early briefings on the budget), show $3.2 billion in costs of
civilian accrual accounting in the FY2002 budget for purposes of comparison with
the FY2003 request, so the added cost in FY2003 is only $0.2 billion. And, finally,
a substantial part of the $9.4 billion for specifically allocated war-related funding will
go to procure material, such as Unmanned Aerial Vehicles (UAVs), intelligence
infrastructure, and communications equipment, that will be in the force for some time
- DOD officials have said that at least $3 billion of the amount for counter-terrorism
is for weapons procurement. So, in all, the money available for new initiatives in
FY2003, compared to FY2002, is more like $20-25 billion - not the whole of the
defense budget increase, but still not insubstantial.

The Impact of Growing Personnel and Operating Costs

The impact of "fact of life" cost increases on the FY2003 budget is relatively large because of some special factors, but it is by no means unique. Table B3
compares the FY2003 defense request with FY2002 estimated funding by
appropriations title - a fairly common way of looking at the budget - with comments
on major reasons for some of the changes. What stands out is how much of the large
increase between FY2002 and FY2003 is going to military personnel and to operation
and maintenance (O&M) rather than to procurement or to research and development
(though, as noted, some procurement is being financed from war-related funds
requested in the operation and maintenance title).

Table B3. Changes in Requested National Defense Funding by Appropriations Title (budget authority in billions of
dollars)

<center>

Fiscal Year:

Estimate2002

Request2003

Change

Notes/Comments

Military Personnel

82.0

94.3

+12.3

+$8.1 health benefits accrual

Operation & Maintenance

129.8

150.4

+20.7

+$15.9 war costs;
-$5.6 health care receipts

Procurement

61.1

68.7

+7.6

+$3.7 for increased cost
estimates

RDT&E

48.6

53.9

+5.3

-

Military Construction

6.6

4.8

-1.8

Limited pending 2005 base
closures

Family Housing

4.1

4.2

+0.2

-

Other

0.9

2.3

+1.4

-

Subtotal, DOD

333.0

378.6

+45.6

-

Atomic Energy Defense
Activities

16.0

16.5

+0.4

-

Other Defense-Related
Activities

1.7

1.7

+0.0

-

Total, National Defense

350.7

396.8

+46.1

-

</center>

Source: Office of Management and Budget; CRS calculations.

Notes: OMB figures include $3.4 billion for civilian retirement benefits accrual in FY2003
and $3.2 billion in FY2002. FY2002 estimate does not include $14.0 billion in
supplemental appropriations requested for counter-terrorism operations on March 21,
2002.

Military personnel accounts have grown especially rapidly in recent years because of pay and benefits increases that Congress approved beginning with the
FY2001 defense authorization act (P.L. 106-398), passed in October, 2000. That bill
included:

the first increment of a Clinton Administration proposal to
reduce out-of-pocket off-base housing costs by increasing basic allowance for
housing benefits;

"Tricare for Life," guaranteeing DOD-provided health care to
over-65 military retirees; and

a requirement that future military pay raises be equal to the
"employment cost index," a broad measure of personnel costs in the economy as a
whole, plus 0.5%.

Last year, the FY2002 defense authorization bill included some additional changes in the pay table to further boost income for selected mid-career personnel, and the bill
also increased special pays and bonuses.

Increased pay and benefits appear to have improved military recruitment and retention, though recent gains may, in part, also be due to a less robust economy. The
increases have also driven up personnel costs dramatically. Table B4 illustrates the
point. Under the Administration's plan, total military personnel funding will grow
from less than $70 billion as recently as FY1998 (in current year dollars - i.e., not
adjusting for inflation) to $94 billion in FY2003 and to $117 billion by FY2007.
After adjusting for inflation (using the Consumer Price Index), personnel costs will
grow from about $48,000 per active duty troop to more than $65,000 in FY2003
prices over the same period.

Source: CRS calculations based on data from the Office of Management and Budget.

*Notes: "CY$" refers to "current year" dollars - i.e., not adjusted for inflation. FY2003 constant dollar figures are calculated using CPI-W deflators. DOD military
personnel deflators are not appropriate to use because they count the amount of
annual pay raises and benefits increases simply as inflation.

A similar, though much longer-term upward trend applies to operation and maintenance (O&M) accounts. A very simple measure of the trend is to calculate
total O&M funding per active duty troop in constant, inflation adjusted prices.
Making some adjustments to reduce inconsistencies from year to year, the result
shows a very constant pattern of growth of about 2.5% per year above inflation from
the mid-1950s on - Figure 1 illustrates the trend.

<center></center> In the past, Defense Department projections often showed O&M costs per troop
leveling off in the later years of each successive five or six year funding plan. When
costs continued to grow, the Clinton Administration's response was either to reduce
planned procurement funding in order to shift money into O&M or to increase the
total defense budget to cover at least part of the shortfall. The Bush Administration
appears, at least from this very rough measure, to be more fully funding likely O&M
cost growth, though the projections, as in the past, do appear to level off between
FY2006 and FY2007. DOD Comptroller Dov Zakheim has said that the
Administration is insisting on more realistic estimates both of procurement and of
operating costs.

Continuing, unabated growth in personnel and in O&M costs takes up a substantial share of projected increases in overall defense spending over the next few
years. Table B5 shows Administration projections of defense funding by
appropriations title through FY2007. Between FY2000, the last full year of the
Clinton Administration, and FY2007, overall national defense funding is projected
to increase by $166 billion. Of the increase, $90 billion is for personnel and O&M
and $63 billion is for procurement and R&D.

Note: OMB figures show $3.0 billion in FY2000 and $3.2 billion in FY2001 for full accrual accounting for civilian retirement benefits, though it was not in effect in those years and is proposed
to begin in FY2003.

Reversing the "Procurement Holiday"

One key issue in congressional debate about the defense budget has been whether the $70 billion or so requested for procurement in FY2003, or even the $99
billion projected for procurement in FY2007, is enough to reverse what former
Secretary of Defense William Perry called the "procurement holiday" in defense
budgets that followed the end of the Cold War. A decline in new weapons purchases,
said Perry in 1996, was justified in the early 1990s, first, because threats had
declined, second, because many new weapons ordered in the 1980s had just entered
the force, and, finally, because older weapons were retired first as the size of the
force declined, so the average age of equipment was dropping even without new
acquisitions. But the holiday would have to end soon, said Perry, in order to avoid
creating an unaffordable "bow wave" of costs in the future to replace large numbers
of rapidly aging weapons.

At the time, the Joint Chiefs set $60 billion per year for procurement by FY1998 as the goal, a target reached in the Clinton Administration's final budget for FY2001.
In the years since Perry laid out the argument, however, the debate has shifted. Now
the issue, at least among defense advocates, is no longer whether $60 billion a year
is adequate, but rather, how much more than $60 billion is needed to meet
modernization needs.

Much of the discussion has been shaped by a series of studies of the amounts needed to sustain a "steady state" procurement rate for major weapons: i.e., how
much is needed to replace the existing stock of weapons with more modern systems
as weapons reach the ends of their planned service lives. A study by the Center for
Strategic and International Studies estimated $160 billion a year, in FY2000 prices,
if strategic nuclear weapons are included in the calculus, and $110 billion a year
without strategic modernization. The Congressional Budget Office made its own
estimate of about $90 billion a year, and the Center for Strategic and Budgetary
Assessments said $80 billion, both also in FY2000 prices. Most recently the
Chairman of the Joint Chiefs, General Richard Myers, said that a Joint Staff study,
not released for public review, concluded that $100-110 billion a year, in FY2001
prices, is needed. (3) After adjusting for inflation, the
$99 billion projected for
procurement in FY2007 does not quite reach CBO estimates of steady-state
procurement requirements: $99 billion in FY2007 prices equals about $83 billion in
FY2000 prices.

Many members of the congressional defense committees have expressed concern that the Administration's budget plan - both in FY2003 and in future years
- does not appear sufficient, despite large increases in the defense total, to finance
planned weapons procurement programs. In the FY2003 request, committee
members have been especially critical of the shipbuilding budget, which calls for
procuring just five new ships. Assuming a 35-year service life for Navy ships, it
would take an average of 8.5 new ships per year to maintain a force of 300 ships in
the fleet. Only in the later years of the FY2003-2007 defense plan does the
shipbuilding rate reach the nominal "steady-state" replacement rate. Some argue that
helicopters, munitions, and other programs are inadequately funded as well.

The Procurement "Bow Wave"

Most recently there have been reports that DOD has been discussing how to cope with a substantial "bow wave" of procurement costs in FY2007 and beyond.
Analytically, a "bow wave" refers to the normal pattern of funding for weapons
programs. The annual budget for any major acquisition program tends to grow as a
system moves from technology development to full scale engineering development
to production. Then the acquisition cost will decline again as production winds
down. Thus the shape of a bow wave. A very large cumulative bow wave can
develop if many new systems are scheduled to begin full production at about the
same time.

This situation now appears to be facing the Defense Department at the end of the decade, when a number of new systems will be in production, including the F-22
and F-35 (Joint Strike Fighter) aircraft, the Comanche helicopter, and several new
Navy ships. According to numerous press accounts, the Defense Department has
been considering how to cope with the substantial projected shortfalls in procurement
funding. The Navy, reportedly, is proposing to cut back substantially on planned
procurement of F-35 fighters, and Secretary of Defense Rumsfeld is reportedly
considering terminating several weapons programs - perhaps some in addition to the
Crusader self-propelled artillery system - in order to safeguard future funds for more
"transformational" weapons (see below).

Defense Transformation

During the presidential election campaign, then-candidate George Bush strongly endorsed the notion of a defense transformation to meet the needs of a dramatically
new security environment. Both President Bush and Secretary of Defense Rumsfeld
have reaffirmed their commitment to transformation in major policy speeches in
recent months. (4) Defense transformation has been
defined in diverse ways, however,
and the Administration has been under some pressure from Congress to articulate its
definition more fully.

Most recently, using categories of transformation laid out in the Quadrennial Defense Review that was released last September, (5)
Deputy Secretary of Defense Paul
Wolfowitz gave a rough estimate of the amount of money requested for
transformation-related initiatives in FY2003 and future years. In testimony before
the Senate Armed Services Committee on April 9, (6)
Wolfowitz said

<blockquote>The six specific transformation goals identified in the QDR are first, to defend the U.S. homeland and other bases of
operation and defeat nuclear, biological and chemical weapons and their means of
delivery. Second, to deny enemy sanctuary, depriving them of the ability to run or
hide, any time, any where. Third, to project and sustain forces in distant theaters in
the face of access denial threats. Fourth, to conduct effective operations in space.
Fifth, to conduct effective information operations. And sixth, to leverage our
information technology to give our joint forces a common operational
picture.</blockquote>

In all, Wolfowitz said, about $21 billion is requested in FY2003 for such transformational goals, and $136 billion is planned over the next 5 years.

Appendix C: Summary Tables

Table C1. Congressional Action on Defense Authorization by Title (budget authority in billions of dollars)

Note: DERF request as shown in the appropriations conference report is reduced by $716.849 million that is transferred to military construction appropriations. DERF allocation is as shown by
the Senate Armed Services Committee in S.Rept. 107-151.

Table C3: Summary of Congressional Action on Defense and Military Construction Appropriations (budget authority in millions of dollars)

Footnotes

2. (back)Early statements by the President and DOD
briefing material on the budget request say the FY2003
increase over FY2002 is $48 billion. This is the increase for Department of Defense discretionary
budget authority if civilian accrual accounting costs are not included in the FY2002 base.

3. (back)Daniel Gouré & Jeffrey M.
Ranney, Averting the Defense Train Wreck in the New Millennium,
(Washington: Center for Strategic and International Studies, 1999); Congressional Budget Office,
Budgeting for Defense: Maintaining Today's Forces, September 2000; Steven M. Kosiak, "Cost of
Defense Plan Could Exceed Available Funding By $26 Billion a Year Over the Long Run," Center
for Strategic and Budgetary Assessments, April 2, 1998; Steven M. Kosiak, "CSIS "Train Wreck"
Analysis of Defense Department's Plans-Funding Mismatch Is Off Track," Center for Strategic and
Budgetary Assessments, February 2000; prepared statement of General Richard B. Myers, Chairman
of the Joint Chiefs of Staff, before the House Armed Services Committee, February 6, 2002.

4. (back)Remarks by the President at the Citadel,
December 11, 2001; Remarks by U.S. Secretary of
Defense Donald Rumsfeld, National Defense University, Fort McNair, Washington, D.C., Thursday,
January 31, 2002.